Have You Ever Waived “Consequential Damages” in a Vendor Contract?

Posted by Edward Sharkey on Wed, 02/08/2017 - 05:00

One thing we see all the time when reviewing clients’ vendor service contracts is a “waiver of consequential damages” for breach of the contract. I have never met a client who knows what this means. Most lawyers do not know. Buyers rarely think about it because it is boilerplate and common. A recent lawsuit involving a service contract highlights the substantial risks of waiving consequential damages.

In the case, a court of appeals affirmed a decision holding that literally all damages caused by a vendor’s breach of contract were consequential, and were thus not recoverable.

It is not so easy to determine whether prospective damages would be consequential or the alternative, “direct.” Here is the general rule: If a stranger to the deal could foresee that the damages would arise from a breach just by looking at the contract, they are direct. If the stranger would have to know more about the parties or their personal circumstances to foresee the damages, they are consequential.

An example: a contractor finishes building a house. One month later, the roof caves in. Direct damages would be the cost to repair the house. Unknown to the contractor, the owner of the house had just sold it, but, because of the damage, the buyer revokes. The loss of the sale of the house would be consequential damages.

The take away for businesses is that they should beware of any waivers of liability - including waivers of consequential damages. Waivers are not innocuous, even if they are boilerplate and common.

What is a reasonable response to a proposed waiver of consequential damages? Depending on the business’s negotiating leverage, there are a couple of options:

• Get rid of it. Most vendors do not know what it means either. Or they expect inattentive buyers to sign anything. If the vendor protests, ask them to explain why you should not be compensated for damages arising from a breach.

• If you cannot delete it altogether, assess the damages you would expect to arise from a breach, and negotiate a clarification of the term. The contract can include statements of anticipated damages, making them more apparent to a hypothetical stranger. This will expand the scope, and recoverability, of potential direct damages.

After all, if the expected harm from a breach is obvious and important to you, there is no good reason to keep it a secret from the vendor.